COST ACCOUNTING
(Guilllermo,2014)
Notes by Ella Mae Famisan
Ch. 1: INTRODUCTION TO
COST ACCOUNTING
Intro: COST ACCOUNTING
- an expanded phase of general or financial
accounting which informs management
promptly with the cost of rendering a
particular service, buying and selling a
product, and producing product.
- The field of accounting that measures,
records, and reports information about costs.
- it is common to small, medium and large
manufacturing companies to have structured
cost accounting systems.
- Shows what costs were incurred and where
and how these costs were utilized
- Cost accounting information is useful or all
types of activities in all types of organizations
- Essential to profit-seeking entities & not-for-
profit entities
The MANUFACTURING PROCESS
- To appreciate importance of cost system, you
must understand the nature of manufacturing
process.
- Involves the conversion of raw materials into
finished goods through the application of
labor and the incurrence of various factory
expenses
- Once the goods are completed an are ready
for sale, the manufacturer performs the same
function as merchandiser in storing and
marketing the goods
FINANCIAL vs. MANAGERIAL vs. COST
ACCOUNTING
Financial Cost Managerial
accounting acco accounting
Financial Accounting
- It is the use of accounting information for
reporting to external parties, including
investors and creditors
- Concerned with financial statements for
external use by those who supply funds to the
entity and other persons who have interests
in financial operations of the firm
- reports prepared are focused on the
enterprise as a whole
- may be historical, quantitative, monetary and
verifiable
- financial accounting is required for
corporations as requirements of the SEC
- required by BIR for compliance w/ Ph’s tax
laws
Managerial Accounting
- focuses on needs of parties within the
organization
- infos commonly addresses individual or
divisional concerns rather than those of the
enterprise as a whole
- may be current or forecasted, quanti or quali,
monetary or non-monetary, most of all timely
data are futuristic and some costs are not
recorded on accounting books
- financial accounting data are used in
managerial accounting system
- managerial acco methods are available for use
to management
Cost Accounting
- intersection between financial and managerial
acco. Cost acco is needed and used by both
financial and managerial accounting
- provides product cost information to external
parties for credit and investment decision
(stockholders, creditors, various regulatory
boards) (cost used in financial acco)
- provides cost information also to internal
parties for planning and controlling
(managers) (cost used in managerial acco)
 COST ACCOUNTING
(Guilllermo,2014)
Notes by Ella Mae Famisan
Figure 1-1 COGS for Merchandising Company Figure 1-2 COGS for Manufacturing Company

Balance Sheet Cash Income Statement Balance sheet income statement

Cash
Preparation preparation Preparation preparation

Materials Purchase of
Inv. Materials Labor Factory overhead
Purchases
(unused)

Work in When used

Plus:
Process
merchandise Production Process
Inventory
inventory
(unfinished)
beginning

MI End Cost of
(cost of Cost of Goods
unsold Goods Sold
Available for (cost of
items)
Sale sold items)

(MI beginning+ purchases) – MI end= COGS Finished Cost of

Goods Goods Sold
Finished Goods
Cost of goods Inventory (sold
Available for sale (unsold Products)
Products)
*(assuming that there is no beginning inventory)

-Manufactures maintain 3 inventory accounts:

1. Materials Inventory- purchased materials
unused during the production process makes up
the ending materials inventory.
2. Work in Process inventory- cost of materials
used + cost of labor services and factory overhead
are transferred to this account, when material,
labor and factory overhead were used in
production process
3 types of cost : DM, DL, FO (w/c are accumulated
in WIP Inv.)
Direct Materials, Direct Labor, Factory Overhead
3. Finished Goods Inventory-. Cost of completed
goods that were remain unsold are moved here.
 COST ACCOUNTING
(Guilllermo,2014)
Notes by Ella Mae Famisan
USES OF COST ACCOUNTING DATA
- cost accounting data provides basis for PLANNING AND CONTROL
determining prduct cost and aids management in - One of important function of cost accounting is
planning and controlling operaions. to develop data w/c can be used by management
in planning and controlling operations
DETERMINING PRODUCT COST
- cost accounting helps management to gather Planning
data needed to determine product costs and - Process of establishing objectives or goals for
thus generate FS and other eports firm and determine the means to attain them
- cost procedures (design) must permit the - Planning is essential because it provides means of
computation of unit costs and total product coordinating all operations of firm
cost - Provide direction
example: - Cost helps in development of plans by providing
A) spent P10,000 for labor in July historical costs
B ) labor produced 5,000 finished units, and - Historical cost serves as basis for projecting data
cost of labor is P2per unit for planning (and to estimate future cost and
information in Example A is insignificant operating results by analysing trends among
information in Exaple B is significant bcos it can data)
e compared to unit labor cost of other periods
and other trends analysed
Strategic Tactical Operations
- unit cost info is also useful in making marketing Planning Planning Planning
decisions. - Long range - Short range - Day-to-day
1. Determining selling price of a product goals and implementation
goals and
plans to of tactical plans.
Selling price should be high enough to cover the overall achieve the
cost of production, pay expenses and direction of - Coordination of
strategic
provide a profit company goals major factors of
2. Meeting competition production
If competitor is selling at lower price, info (materials,
about unit cost may be used for company to labor, facilities)
know if selling price or manufacturing cost
must be reduced, or eliminate the product.
3. Bidding in Contracts
Analysis of unit cost relating to
manufacture a product is important to
determine the bid price to be submitted.
Bid price must cover costs to be incurred
and provide profit. Must not be too high.
4. Analysing Profitability
unit cost info helps to determine amount of
profit that each product earns and to
eliminate the least profitable products.
 COST ACCOUNTING
(Guilllermo,2014)
Notes by Ella Mae Famisan
TWO BASIC PRODUCT-COSTING SYSTEMS
(PRODUCT COST ACCOUNTING SYSTEMS)
1. Job order costing
2. Process costing
 Both provide product unit cost information for
pricing, cost control, inventory valuation, and
income statement preparation.
JOB ORDER COSTING
(JOB ORDER COST ACCOUNTING SYSTEM)
- A product-costing system used in making one-of-a-
kind or special-order products.
- System allocating costs to groups of unique
product.
- Each job becomes cost center for which costs are
accumulated
- Applicable to production of customer specified
products
- Direct materials, direct labor, and factory overhead
costs are ssigned to specific job oders or batches of
production
- COMPUTING UNIT COST: TMC/N
Unit Total Manufacturing Cost__
cost No. of Good units produced
- Examples of co. using job order costing: those
making ships, airplanes, large machines, and
special orders.
- SUBSIDIARY RECORD (JOB COST SHEET) used to
keep track of all unfinished jobs (WIP) and finished
jobs (Finished goods)
- More costly record keeping (coz it’s more detaied.
It records the cost of each unit produced)
MAIN CHARACTERISTICS OF JOB ORDER COSTING
1. Collects all manufacturing cost & assignes them to
specific job/batches of product
2. Measures cost for each complete job
3. Just one WIP inventory control
account. (w/c is supported by
subsidiary ledger of job order cost
cards/sheets for each job in process)
PROCESS COSTING
(PROCESS COST ACCOUNTING SYSTEM)
- Product-costing accounting system used by
companies that make large number of similar
products or maintain continuous production
flow
- more economical to account cost for a period
of time (weekly or monthly) than assigning to
specific products or job order
- examples of co. using process costing: those
producing paints, oil. Gas, automobiles, bricks,
softdrinks
- less costly record keeping (coz it’s less
detaied. It does not record the cost of each
unit produced)
unit cost=
___ TMC @department___
Unit of production
total unit cost=
TMC @dept.1 + TMC @dept.2 ....
Unit of production Unit of production
*(TMC@dept.- total manufacturing cost assigned
to a department or work center)
MAIN CHARACTERISTICS OF PROCESS COSTING
1. manufacturing cost are grouped by
department or work center
2. emphasizes in time period
(weekly/monthly)
3. uses several Works In Process Inventory
account (one per department)
HYBRID COSTING SYSTEM
- blending of job order and process costing
- OPERATING SYSTEM: a hybrid costing system
- Used in repetitive manufacturing
where finished products have common
& distinguished characteristics
- Example: manufacturer of clothing,
mobilephones (same characteriscics
but have variations maybe in quality
and specs)
 COST ACCOUNTING
(Guilllermo,2014)
Notes by Ella Mae Famisan
CHAPTER 1 EXERCISES III. Multiple Choice
1. FS for external users can be described as
I. Questions a. User-specific c. special purpose
1. Define Financial accounting b. General purpose d. management reports
2. Define Management accounting 2. Planning is a function that involves
3. How management accounting serve both external and a. Hiring right people fo a job
internal users? b. Coordinating the accounting information
4. Differences of financial acco & managerial acco? system
5. Why managerial accounting information more “future c. Setting goals and objectives for an entity
oriented” than financial accounting? d. Analysing FS
6. relationship between goals, planning, and controls 3. Which of the following is not a management
7. Identify and define 3 levels of planning function?
8. Differentiate job order costing and process costing a. Constraining c. controlling
9. main characteristics of job order costing? b. Planning d. directing and motivating
10.main characteristics of process costing? 4. A manager that is establishing objectives is
II. True or False performing which management function?
1. Reports prepared in financial accounting are general- a. Motivating c. planning
purpose reports, whereas reports prepared in b. Directing d. constraining
managerial accounting are usually special-purpose 5.
reports
2. Managerial accounting internal reports are prepared
more frequently than are classified FS
3. Determining the unit cost of manufacturing a product
is an output of financial accounting
4. Management accounting apples to all forms of
business organizations.
5. Controlling is the process of determining whether
planned goals are being met
6. Managerial accounting information generally pertains
to an entity as a whole and is highly aggregated
7. Job order cost accounting system is for allocating
costs to group of unique product and is applicable o
the production of customer specified products such as
manufacture of special machines
8. Process costing is used by companies making one-of-
a-kind products
9. Operation costing is a hybrid costing system often
used in repetitive manufacturing where finished
products have common and distinguishing
characteristics
10.Cost accounting procedures help management in
gathering data needed to determine product costs
and thus generate meaningful FS and other reports